A Communication-Based Theory of the Choice Between Greenfield and Acquisition Entry

This paper develops a communication-based theory of the choice by multinational enterprises (MNEs) between greenfield and acquisition entry. It argues that MNE parents communicate with their subsidiaries for reasons of knowledge exchange, coordination, monitoring, and socialization. The expected communication costs arising from these activities are argued to increase with the verbal communication barriers existing between a prospective subsidiary and its parent, but this increase is argued to be larger for acquisitions because they require more extensive parent-subsidiary communication than greenfields. I therefore hypothesize that verbal communication barriers have positive effects on the likelihood that MNEs choose greenfield over acquisition entry. I also hypothesize that these effects are weaker for prospective subsidiaries that will have more autonomy or local co-owners. An analysis of 231 entries by Dutch MNEs into 48 countries lends substantial support to these hypotheses, indicating that geographic and linguistic barriers to verbal communication play important roles in MNEs' establishment mode decisions.